China’s Reaction to the US Government Shutdown – Gimme Some!

October 8, 2013
October 30, 2014

The best investors I know place their bets according to probabilities. It’s been over a decade since I moved my life and my capital to the far east. The fundamentals were too important to ignore, and ultimately the fundamentals lead to probabilities.

The US government had a plan to counter the rapidly growing dominance of China in the Asia Pacific region. The Trans Pacific Partnership (TPP) was Washington’s grand plan to push through a 12 nation trade pact. This was part of a broader “Pivot to Asia” policy unveiled back in 2011.

The APEC and ASEAN summits were to be Washington’s chance to push forward and become a bigger player in Asia. The reasons are obvious. The US wants to enmesh itself more deeply into Asia, the fastest-growing economic region in the world today.

Furthermore, Washington wishes to counter the rapidly growing influence of both Russia, but especially China throughout what is the largest emerging market region in the world today.

Alas it was not to be. Instead Obama was grounded from playing with the other kids and forced to stay home, presiding instead over squabbling bureaucrats, all the while trying to keep Obamacare alive, and the debt ceiling from crashing down on his presidency.

As embarrassing as his presidency has been thus far, and to be sure it has been incredibly embarrassing, losing Obamacare AND defaulting on the US’s debt would be…well, his Opus!

Instead of attending the APEC summit, and the ASEAN summit which follows closely on its heels, Obama sent his “brother from another mother”, the increasingly inept and politically sterile, John “it was a rhetorical statement” Kerry.

Anyone who has spent any length of time in Asia and done business here knows the unspoken rule. “Face” is extremely important. Failing to show up for an important meeting and sending a “lesser” in your place is considered insulting and rude. Little will likely be said in public about this, but the repercussions are typically far less subtle. Rest assured business deals will continue to be struck…just expect these to increasingly exclude Washington.

Obama’s policy of “Pivot Asia” rests on increasing military presence in the region, beginning with a much vaunted 2,500 marines to be stationed in Northern Australia by 2017. I find it interesting that the “pivot Asia” policy is led by military deployment.

This “investment” will cost $1.6 billion, and that’s just to build housing for the marines. If previous government “projected costs” are anything to go by, this expense will likely balloon. One does have to wonder how barracks for 2,500 marines can possibly cost $1.6 billion (for those without a calculator handy, that’s $640,000 PER MARINE!). I hope those are damn nice barracks Mr. Obama! Oh, you poor US taxpayers. When is enough going to be enough?

But, fear not…the debt ceiling will be raised to accommodate for this…and much, much more.

When one considers investing or buying a business it’s obvious that in order to be more profitable you need to curtail expenses as much as possible while generating more revenues at the same time. Common sense stuff, right?

While Washington’s strategy involves spending money (the military doesn’t actually produce, they consume – unless you count blowing things up so friends of the politicos at Halliburton and Bechtel can rebuild it all with taxpayer dollars), which does more to antagonize the locals than bring willing reciprocal trade, we watch China leading with investment and business relationships.

Last year when traveling through Laos, China’s influence was exceptionally notable. The same is true in Cambodia, where some months back we held our last member Meet-Up.

Up in Siem Reap, Cambodia’s answer to the pyramids, where I spoke with hoteliers, developers and tourism operators China’s influence is all present. In fact, I’d go so far as to say that increasingly Cambodia and Laos, and even Vietnam are becoming “client states” of Beijing.

It’s curious, but I have yet to see Chinese soldiers on the streets in Asia, but finding Chinese companies contracted to build roads, hotels, ports, pipelines and the like is increasingly like shooting fish in a barrel.

To put some colour to the size of the investments being made by China, net investment in the ASEAN region during 2012 surged 52% to $4.42 billion, and it continues to rise. Chinese investment in Vietnam alone rocketed 147% during 2012.

So what has happened recently while America has been “closed for business”?

China’s predominant foreign policy has been cutting business deals, while the US policy has been one of military deployment followed by pressuring trade deals. Reception to the latter, not surprisingly, is increasingly being viewed as one-sided and not a win-win. Many of these trade deals have not come to fruition. I wonder why?

I provide two quick examples below, since sadly it would likely take up too much of you, our readers precious time to read them all…and there are plenty!

APEC summit – China pledged to boost trade with ASEAN to a mammoth US$1 trillion by 2020. They are already the largest trading partner in the region. They will partake in mega-projects such as the construction of the ambitious 90,000-hectare dam in West Java.

US$30 billion worth of deals in mining and port construction – Contracts with the Indonesian president, Susilo Yudhoyono, were secured for Chinese companies to build the long-overdue Jakarta monorail project.

I suspect the ASEAN summit will likely produce a smorgasbord of similar deals being cut. This can only be seen as an epic failure on the part of the United States and simply yet more evidence of the movement of trade, power and capital from the West to the East. European countries hardly featured at all, with Russia and China taking the limelight.

Both the ASEAN and APEC summits were seen to be an opportunity for Washington to mend and try to resurrect talks on the TPP, which have for 3 years now led to precious little, and with increasing resistance from many countries to what have been seen as belligerent demands from Washington for unprecedented access to domestic Asian markets.

I think Carl Baker, director of the Pacific Forum at the Center for Strategic and International Studies in Hawaii, summed it up appropriately when he said:

“Even if the administration could push through some agreement on the TPP, it’s very unlikely there is going to be legislative success getting that through based on the acrimony that exists.”

“…On the commercial side (of the pivot), there seems to be more rhetoric than action.”

- Chris

“This is the United States of America, we’re not some banana republic. This is not a deadbeat nation. We don’t run out on our tab. We’re the world’s bedrock investment, the entire world looks to us to make sure the world economy is stable. We can’t just not pay our bills.” - Barack H. Obama

Believing that America would default is like being stranded on the bottom of the observation wheel? The failed President is cutting a trade and banking deal with Europe for ’14! Sending Kerry was about being rude and helping China with its legendary patience? Controlling energy is America-Saudi-Russia triads goal of controlling China. Opening up the east is much different than opening the internal areas of China except when it comes to loans and energy? Your move east has been countered by just as many east moving west. If not more? The latest failed President follows a longer line of successful central bankers or is Volker still a God?